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House Rent Allowance Vs Home Loan: Which is the smart tax option?

Archit Gupta
HRA, home loan, HRA vs Home loan, House Rent Allowance Vs Home Loan, taxability of HRA, taxability of hra for government employees, income tax act,

Payments towards housing accommodation form a significant part of the living expenses of a taxpayer. Taxpayers who are employees may pay house rent or make repayments towards housing loan. There are scenarios where taxpayers paying rent also make housing loan repayments. Taxpayers would like to know their entitlement to deductions towards the payments for housing accommodation and their entitlement for house rent exemption. Let us understand the benefits available under the income tax law:

House Rent Allowance

House rent allowance (HRA) is given as a component of salary. Salaried taxpayers who pay rent for their residential accommodation are entitled to claim HRA exemption. The exemption is calculated on the basis of the basic salary of an employee. Let us understand the exemption with the help of an example:

Riyan lives in Hyderabad at a rent of Rs 40,000 a month. He receives HRA of Rs 50,000 a month. His basic salary is Rs 100,000 a month. Let us calculate the HRA exemption for the FY 2018-19:

Rs 50,000*12 = Rs 6,00,000

40% of (Rs 1,00,000*12) = Rs 4,80,000

(Rs 40,000*12) 4,80,000 – 1,20,000 (10% of Rs 12,00,000) = 3,60,000

The annual basic salary of Riyan would be Rs 12,00,000. The annual rent paid is Rs 4,80,000. The annual HRA received would be Rs 6,00,000. The HRA exemption is allowed at lower of the above, i.e., Rs 3,60,000. Here an employee has to furnish the PAN of the landlord for the purpose of claiming HRA exemption.

Purchase of House Property

Purchase of a house requires funding in the form of a housing loan. The purchase entails repayments of loan and interest payments. An employee claiming HRA exemption may also make repayments towards housing loan. The property may be self-occupied or let out as per the requirements of a taxpayer. Let us understand the benefits and entitlements for the property:

# Self-occupied

A property self-occupied by a taxpayer is entitled to a deduction for interest payments up to Rs 2 lakh a year. This interest can be reduced from the salary and other income of an employee. The taxpayer cannot claim HRA exemption where the owned property is occupied for their own residence.

# Let out

A let out property is entitled to a deduction of the entire interest paid. However, in case the interest payments exceed the rental income, a maximum of Rs 2 lakh loss is allowed for set off against salary and other income. In this case, if the taxpayer resides in the same city in rented accommodation, no HRA exemption is allowed. However, where the taxpayer resides in another city for employment, an HRA exemption can also be claimed for the rent paid in such other city.

# Vacant

A property lying vacant due to the taxpayer s employment in another city is entitled to a deduction towards interest payments up to Rs 2 lakh a year. This interest can be reduced from the salary and other income of an employee. In this scenario, the employee can claim HRA for the rent paid in the city of employment.

In all of the above scenarios, the purchase or construction should be completed within 5 years from the end of the financial year in which the loan is taken. Additionally, the repayments made towards housing loan including registration expenses are entitled to a deduction up to Rs 1.5 lakh a year. For this purpose, the employee should not sell the property within 5 years from the date of obtaining possession. On a cumulative basis, an employee can make claims up to Rs 3.5 lakh a year towards housing loan and interest payments.

(The author is Founder & CEO, ClearTax)